China has just announced a switch to prudent monetary policy from a moderately loose one - a change that could pave the way for more interest rate increases and lending controls. At the same time, the rulers have also decided to maintain China's proactive fiscal policy, an indication that the government wants to continue to ramp up investment spending even while taking tightening steps to control inflation. This is a very good and sharp move. Global markets were little affected, with investors taking the view that this move was an affirmation of the gradual tightening that Beijing has already started to implement in recent months.
"China has no need now to worry about overall demand at all," said Dong Xian'an, chief economist with Industrial Securities in Beijing. "Instead, the top priority is to curb inflation and avoid economic overheating."
Consumer price inflation hit a 25-month high in October of 4.4 percent and is expected to have edged higher in November. Although it has been driven almost exclusively by food prices, pressures have been broadening on the back of higher global commodity costs. It will be even more wise to consider the impact of impending American devaluation... something which the Chinese government has yet do. Anyhow, a major government's stimulus program was a flood of lending by banks. China has already begun to rein in loan issuance this year and the shift to a prudent monetary policy could signal more restrictions next year. A prudent policy could imply a new lending target down about 15 percent.
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